Breaking Down the Stablecoin Business: Tether Rakes in Billions, but Retail Investors Struggle to Get a Piece of the Pie?

Original author: Alex Liu, Foresight News

Casino rake - exchange; interest-free bank - stablecoin. The analogy may not be entirely appropriate, but it is sufficient to reflect how lucrative the business models of the two hottest sectors in the crypto industry are. The competition in the exchange field is fierce, and structural opportunities are hard to find, while a new round of speculation targeting stablecoins seems to have just begun.

Recently, USDC issuer Circle became the first stablecoin to go public, attracting capital interest, with the closing price on the first day reaching three times the IPO pricing, and a market value exceeding 20 billion USD; behind this is the shadow of Tether, as the stablecoin payment chain Plasma raised 500 million USD within minutes, and some were even willing to pay over ten thousand USD in ETH network fees to deposit more than 10 million USD.

Circle Stock CRCL Price

Stablecoins, why is it said to be a good business? Even so, can retail investors participate? This article aims to briefly analyze the current mainstream stablecoin operating models and profit levels, pointing out the reality that "those who make money do not want to go public, and those who go public may not share profits" and the dilemmas faced by retail investors in this sector, as well as exploring potential solutions.

Are Stablecoins a Good Business?

To conclude, whether stablecoins are a good business depends on different players. Currently, the most profitable player is Tether, the issuer of Tether USD (USDT).

It is actually inappropriate to liken all stablecoins to a "bank that does not pay interest". The industry has interest-bearing stablecoins such as sUSDe, sUSDS, sfrxUSD, and scrvUSD, where the earnings return to the depositors. However, looking specifically at the player Tether, it is even more outrageous than a "bank that does not pay interest" – not only does it not pay interest, but it also charges a 0.1% redemption fee when redeeming USDT for US dollars (withdrawal), with a redemption fee cap of 1000 USD.

Unlike banks, the sources of income for stablecoins are diverse. The main income of banks comes from lending funds to borrowers, earning the interest spread between loan interest and the interest paid to depositors. If borrowers are unable to repay, there may also be bad debt losses. Mainstream stablecoin issuers like Tether obtain risk-free returns by using fiat cash to purchase U.S. short-term Treasury bills (T-Bills), eliminating bad debt risk, making it a superior profit model compared to "banks that do not pay interest."

Stablecoin protocols like Ethena are more like complex fund management platforms, primarily profiting from the funding rates obtained through the spot staking of crypto assets and perpetual contract hedging, which correspondingly increases risk. Stablecoins launched by protocols such as Curve, Sky, and Aave mainly profit from lending interest, which also carries its own risks. While some or all of the interest returning to depositors in interest-earning stablecoins is certainly favorable for users depositing funds, it reduces the profitability of the underlying business model.

Net profit of some companies and number of employees

In this way, only in and out, the low-risk Tether is completely "lying down to make money". As shown in the chart above, Tether's 24-year profit is $13 billion, surpassing financial giants such as Morgan Stanley and Goldman Sachs, while its 100 employees are only a few hundredths of the latter, reflecting a very high human efficiency ratio. Binance, a crypto exchange with similar levels of profitability, with more than 5,000 employees worldwide, is similarly lagging behind in terms of human efficiency. Changpeng Zhao recently admitted on X that Binance is "far less efficient" compared to Tether. The reason for this is that Tether only needs to concentrate on its core and most lucrative USDT business, and at the same time, USDT itself has a first-mover effect and network effect, and the market demand for it continues to expand, and it can expand naturally without spending too much marketing effort. Crypto exchanges, on the other hand, have complex and fierce competition, requiring new coins, customer maintenance, marketing activities, etc., which consume a lot of manpower and capital costs.

Tether's USDT is indeed a good business. Circle is the "number two player" in the stablecoin sector, with its USDC now having a market value of over 60 billion dollars, reaching nearly 40% of Tether's USDT. It should also be a "money printer," right?

The answer is negative, at least temporarily negative.

According to Circle's financial report, its net profit for 2024 is only $155 million (Tether is in the tens of billions). This is because Circle has distribution costs of over $1 billion, and most of the gross profit is shared with partners like Coinbase and Binance to promote the adoption of USDC. For example, the profits generated from USDC on the Coinbase exchange are fully owned by Coinbase (Coinbase distributes the earnings as interest to users), and Coinbase also receives half of the profits generated by USDC outside of the exchange.

Circle Financial Report Table

Faced with the pressure from competitors (whether it's USDT, which does not compete with USDC on compliance grounds, or compliant alternatives like PYUSD and FDUSD), Circle's distribution costs are likely to remain high for a long time in order to maintain its adoption advantage. In summary, Circle is full of potential, but is currently struggling in a highly competitive environment and has not yet realized a profitable business.

The Predicament of Retail Investors

It is not difficult to see from the above that Tether, the "number one player" in the stablecoin sector, is undoubtedly a business worth investing in, but the current situation is that retail investors cannot gain exposure.

Tether's CEO Paolo Ardoino tweeted on X, "If Tether goes public, the company's market value will reach $515 billion, surpassing Costco and Coca-Cola to become the 19th largest company in the world," and commented, "We currently have no plans for an IPO." Given Tether's profitability, there is no need to bring in external funding. If you obtained exclusive operating rights for a casino in Macau, you would probably want to operate independently rather than bring in partners.

In other words, the most profitable players in the stablecoin sector do not want to go public.

Should retail investors consider investing in the already listed "No. 2 Player" Circle? Very few investors can buy CRCL at an IPO price of around $30. What most retail investors are facing is CRCL, which surged to a market value of over $10 billion with a net profit of $100 million right at the opening, resulting in a price-to-earnings ratio exceeding 100. Buying stocks with such a high price-to-earnings ratio is typically a "bet on the future," which carries considerable risk.

Moreover, as a high P/E ratio "internet technology company" that is in a rapid growth phase, it is normal not to pay dividends for a long time. Being its shareholder does not mean you can "make money while lying down."

Those who make money don't want to go public, and those who go public may not necessarily share profits. "Profit" is actually unrelated to retail investors. Facing a lucrative track but finding it difficult to get a share, this is the dilemma for retail investors.

Usual's Attempt

What retail investors need may be the Usual model.

Usual is a controversial stablecoin protocol that has caused significant user losses due to its USD 0++ "de-pegging," severely undermining community trust in the project. However, the mechanism design of the Usual protocol itself has its highlights, making valuable attempts in allocation mechanisms and token economics.

The stablecoin usually issued is called USD 0, and each USD 0 is backed by 1 dollar worth of RWA (Real World Assets). The RWA here actually refers to stablecoins like USYC and M, which derive their yield from U.S. short-term Treasury bonds (T-Bills) and are issued by licensed compliant RWA issuers like Hashnote.

Holding USD 0 simply does not generate any interest, and the yield from the underlying RWA assets is captured by the protocol. Similar to Tether, this is a good business.

But Usual is not Tether after all. USDT has the first-mover advantage and network effect, creating real-use cases that support demand — trading within exchanges, acting as a shadow dollar for payment mediums in Southeast Asia, Africa, and so on, where people voluntarily hold USDt. But why would anyone hold USD 0 without interest?

The usual role of the ecosystem USD 0++ comes into play. The correct name for USD 0++ is the Liquidity Enhanced Government Bond, but it carries USD in its code, which can easily be misunderstood as a stablecoin. Users can stake USD 0 as USD 0++, and each USD 0++ can be redeemed for 1 USD 0 after 4 years (i.e., in 2028). It is not difficult to understand that, before the 4-year maturity, the value of USD 0++ should be less than 1 USD 0 and will gradually approach it over time.

This is the model of government bonds. I buy a 1-year government bond with a face value of 110 for 100 yuan. At maturity, I redeem the bond for 110 yuan, thus locking in an annual yield of 10% at the time of purchase. Similarly, the closer a government bond gets to its redemption date, the closer it approaches its par value.

During the rapid development phase of the protocol, Usual exchanged USD 0 and USD 0++ at a 1:1 ratio, which inadvertently deepened the misunderstanding that USD 0++ is a stablecoin, directly responsible for the damage caused by the subsequent "de-pegging" of USD 0++. It cannot be considered a stablecoin, hence there is no talk of "de-pegging", but holders did incur losses.

Staking USD 0 yields USD 0++, and the user has committed the future earnings of this capital for the next 4 years. So why would a user do this? Usual provides USUAL tokens, which offer yields higher than normal government bonds as "enhanced earnings" for USD 0++. Previously, the annualized return exceeded 100% during high price levels, and it is currently around 10%.

Usual ecological token rewards

This requires the USUAL token to have value, but what empowerment does the USUAL token provide? The USD 0 underlying treasury bond yields captured by the protocol will be distributed weekly to USUAL stakers (USUALx holders) in proportion, and USUAL stakers can also receive USUAL token emissions. Currently, Usual's TVL (Total Value Locked) is approximately 630 million USD, with about 520,000 USD 0 allocated weekly to USUAL stakers (approximately 50% APY).

In short, without the Usual protocol, if I buy government bonds with US dollars, I receive bond yields; however, with the Usual protocol, I hold USD 0, and the underlying US dollars are used to purchase government bonds, but there is no interest. By staking USD 0 for USD 0++, I can obtain USUAL tokens, and by staking USUAL, I receive the underlying government bond interest.

The value of the USUAL token derives from the right to proceed from depositors' funds, a flywheel game of "dig yourself" that revolves entirely around TVL. Theoretically, if the TVL rises, the weekly profit dividend will increase the price of the USUAL coin, bringing higher USD 0++ income and attracting higher TVL. But the flywheel can also be reversed – a drop in the price of USD 0++ leads to a decrease in USD 0++ earnings, and a decrease in TVL leads to a decrease in the dividends of the USUAL token, triggering a further decline in the price of the coin.

This model relies heavily on token emissions for sustenance. 90% of USUAL tokens will be released over a period of 4 years through airdrops and as returns of USD 0++ tokens. The remaining 10% of the total token supply is held by the team and investors. What happens when the tokens are fully released? After 4 years, all USD 0++ tokens will expire, and there will be no need for USUAL tokens to continue emission.

What the Usual team needs to do is to establish real use cases for USD 0 during this 4-year window when the regulatory environment is good and competitors have not fully entered the market, and use token incentives to drive the flywheel, accumulating considerable TVL advantages and network effects. Four years later, Usual will return to Tether's model, with the difference being that its profits are distributed to USUAL token stakers.

This is actually a chip distribution period lasting 4 years.

What are the advantages of such exploration? Why is it said that retail investors may need the Usual model?

Usual allows retail investors to gain exposure to Tether-mode profits through the USUAL token. By saving, staking, and trading, investors can obtain USUAL tokens, which lowers the investment threshold for the revenue rights behind Tether-mode stablecoins. The token flywheel mechanism provides retail investors with an opportunity to acquire chips at a low cost – USUAL tokens obtained at lower TVL may appreciate significantly as the protocol grows. If one chooses to "mine by oneself" and only deposits funds without purchasing USUAL tokens, the worst outcome is simply a loss of interest.

The stablecoin sector is obviously on the rise, and the failure of Luna is still fresh in our memory. Can retail investors share a slice of the pie in this sector? Or will this lucrative opportunity ultimately fall into the hands of giants like Wall Street? We will be fortunate to witness this together in the coming years.

Disclosure: The author of this article is involved in the USUAL ecosystem.